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Alerts and Updates

Employers Can Make Tax-Free Payments to Employees Under IRS Section 139 During COVID-19 Pandemic

March 18, 2020

Employers Can Make Tax-Free Payments to Employees Under IRS Section 139 During COVID-19 Pandemic

March 18, 2020

Read below

Qualified disaster relief payments are generally deductible by the employer and are not subject to any federal withholding obligations.

On March 13, 2020, COVID-19 was designated a disaster under the Robert T. Stafford Disaster Relief and Emergency Assistance Act. As a result, employers are permitted to make tax-free reimbursements and payments to employees under Internal Revenue Code Section 139. This Alert will outline the rules governing these reimbursements and considerations that employers must take into account when implementing such a program.


Under Code Section 139, an individual’s gross income cannot include any amount received as a “qualified disaster relief payment.” In the context of COVID-19, a qualified disaster relief payment means any amount paid to reimburse or pay reasonable and necessary personal, family, living or funeral expenses incurred as a result of COVID-19―but only to the extent any expense compensated by such payment is not otherwise compensated for by insurance or otherwise.

Qualified disaster relief payments are generally deductible by the employer, are not subject to any federal withholding obligations and do not need to be reported on a Form W-2.

Considerations for Employers

While prior disasters that have triggered Code Section 139 have been natural disasters, such as Hurricane Katrina, COVID-19 is unique in that it is an infectious disease pandemic. However, regardless of the type of disaster, wage replacement is never permissible to the recipient and is always treated as a taxable wage. Therefore, Code Section 139 cannot be utilized as a wage replacement alternative.

There are many potential categories of expenses that could be triggered in the COVID-19 context and reimbursed under Code Section 139―including, but not limited to, medical expenses, child care expenses due to school closures and increased home expenses (including increased utility expenses). The only limitation under Code Section 139 is that such expenses related to COVID-19 must be “reasonable and necessary.”

While Code Section 139 does not require a written plan document, it is recommended that employers adopt a written policy or program. The reason for this is twofold: (1) the IRS previously approved a written program in Revenue Ruling 2003-12 and it is therefore viewed as a best practice to have a written program to support the favorable tax treatment under Code Section 139, and (2) employees should be informed of the availability and parameters of such a program.

Any policy or program adopted by an employer must outline the features of the program, including limiting payments to those that are “reasonable and necessary” in the context of the COVID-19 outbreak, describing the eligible employee class or group and listing expenses that will be subject to reimbursement or payment.


Employers that wish to provide impacted employees with assistance in these difficult times are encouraged to consider the adoption of a Code Section 139 program, as it will result in tax-free benefits to the employee that are also tax deductible to the employer.

About Duane Morris

Duane Morris Benefits and Executive Compensation attorneys are available to assist employers in any way with respect to the novel and unique issues arising with respect to the coronavirus outbreak, including the implementation of a program under Code Section 139.

Furthermore, Duane Morris has created a COVID-19 Strategy Team to help employers plan, respond to and address this fast-moving situation. Contact your Duane Morris attorney for more information. Prior Alerts on the topic are available on the team’s webpage.

For Further Information

If you have any questions about this Alert, please contact any of the attorneys in our Employee Benefits and Executive Compensation Group, any of the attorneys in our Employment, Labor, Benefits and Immigration Practice Group, any member of the COVID-19 Strategy Team or the attorney in the firm with whom you are regularly in contact.

Disclaimer: This Alert has been prepared and published for informational purposes only and is not offered, nor should be construed, as legal advice. For more information, please see the firm's full disclaimer.